The term “bear market” is used to describe a downward trending stock market, usually among one of the major indices, such as the Dow Jones Industrial Average, the S&P 500, or the NASDAQ Composite. But bear markets can be associated with any asset class. For instance, a bear market can happen in municipal or corporate bonds or U.S. Treasuries, or even currencies or commodities. Bear markets don’t apply to consumer prices, where a drop is referred to as deflation.
A bear market is more than just a drop in the market. Financial experts and economists usually don’t consider a downturn to be a true bear market unless it has dropped 20% or more and has sustained a downward trend for two months or more. During a true bear market, the economy will become sluggish, companies may begin laying off workers, and investors often become more averse to risk. As share prices drop, investors begin losing faith in their recovery and this can lead to further drops.
A bear market is the inverse of a bull market, which is an extended period of rising stock prices. You’ll often see the popular image of a bull attacking with its horns up and the bear attacking with claws down to represent these market trends.
Characteristics of a bear market
Bear markets aren’t just characterized by sustained market drops, but also by some general economic conditions that accompany them:
- Negative investor sentiment: The market is sensitive to investor behavior, and when investors begin to lose faith that stocks will rise, they may sell off stocks and put their money in fixed-income securities as they wait for a turnaround. This can lead to a cycle that is typical of a bear market: Investors keep their money out of the market, which causes further declines, and so on.
- Economy weakens: Because consumers slow their spending, businesses record lower profits, and the market values their stocks lower. The signs of a weak economy include the drop in profits, plus lower employment, low disposable income, and lower productivity. Still, a bear market doesn’t necessarily indicate a coming recession. There have been 26 bear markets since 1929 but only 15 recessions.
- Demand for securities falls: In a bear market, more people are trying to sell securities than buy them, which leads to an increased supply and lower share prices.
Phases of a bear market
Economists usually recognize that there are roughly four bear market phases.
- Recognition: Markets fluctuate—it’s what they do. In its initial stages, investors might not acknowledge the signs of an impending bear market. As they begin to believe that the market’s slide could be sustained, they begin to drop out of the markets.
- Capitulation or panic: Investors who bought on a downturn experience regret as the security doesn’t bounce back. Unexpected losses can lead to panic, investors sell off stocks, and the market falls further.
- Stabilization and speculation: The downward slide stops and investors stop panicking, but they are also not sure where the market will find its true bottom. Marked by short-term rallies and drops as stocks find their footing, this low point may not feel as precipitous to investors, but it is still sobering. It can also be the bear market’s longest period. Speculators with an iron constitution may start snapping up low-priced securities, leading to some higher prices and trading volume.
- Recovery: Some investors see economic improvement ahead and that optimism—and investment—leads to higher stock prices and a rebounding market. The good news attracts more investors, and the market pulls out of bear territory.
How long do bear markets last?
Bear markets are typically shorter than bull markets, lasting 349 days on average versus 1,742 days for a bull market. Their losses average 36.34% compared with gains of 180.04%, according to research compiled by Invesco. Those afraid of a bear market can look at history to see that, despite its sometimes dramatic highs and lows, the stock market return over time is around 10%.
A regular bear market is called a cyclical bear market and lasts for a few months to a few years. A secular bear market is driven by long-term trends, can last over a decade, and may include short-term rallies.
Examples of bear markets and their causes
Bear markets can be caused by government intervention in the economy, changes in the tax rate or the federal funds rate, or drops in investor confidence (for any reason). In fact, there have been 33 bear markets since 1900, occurring every 3.6 years on average, so historians have plenty of examples to study. Here are some notable bear market examples:
- 2020 COVID-19 crash: The COVID-19 pandemic caused businesses to shutter and battered industry around the world. Because of the speed at which panic spread, the stock market fell into a bear market faster than any other time in history.
- The 2008 bear market: The subprime mortgage lending crisis triggered the collapse of the housing bubble, which was financed with mortgage-backed securities. The crisis led to bank failures, including the collapse of Lehman Brothers. Massive bailouts prevented the U.S. banking system from collapsing, but by its 2009 low, the S&P 500 had fallen by more than 50% from its previous high. The Dow didn’t reach its 2007 high again until March of 2013.
- The dot-com crash of 2000-2002: Massive speculation in technology stocks in a climate of innovation (but also overvaluation) ended one of the greatest bull markets in U.S. history. The bear market began in January 2000, triggered the 2001 recession, and the economy was further impacted when the events of the September 11, 2001 terror attacks shut down stock exchanges.
- The Great Depression: The Dow fell 90% from 381 in 1929 to 41.22 by July of 1932. The depression was precipitated by the 1929 stock market crash, which was caused in part by investors buying stocks on margin (borrowing money from their broker and only putting a percentage down on a stock). The crash was the main event in a nearly three-year bear market that coincided with the Great Depression. Most historians and economists recognize the Great Depression as lasting from 1929 until 1939.
Investing during a bear market
Understanding the length and causes of bull and bear markets can inform how investors react to them. Armed with the knowledge of the statistical length and intensity of a bear market can help investors keep a long-term view. These are considerations to keep in mind for bear market investing.
- Diversification: Spreading investments across asset classes is a well-known strategy, relevant during both bear and bull markets, that can buffer investors’ overall portfolios from the losses they’d incur by putting everything in a single investment category that didn’t perform or lost value. Diversifying can mean spreading investments across assets classes and also within asset classes, like investing across different sectors in the stock market.
- Asset allocation: Sectors that tend to perform better during down markets include utilities and consumer goods. Some investors choose to invest in specific sectors through exchange-traded funds (ETFs), a type of investment fund that tracks an index, sector, or commodity and is bought and sold throughout the day on stock exchanges.
- Dollar-cost averaging: Continually investing money over time in roughly equal amounts can help long-term investors buffet the shorter-term highs and lows in the market. The practice of dollar-cost averaging shields investors from dumping all their money into a stock at its high while it also allows them to take advantage of some dips in the market.
- Long-term view: Statistically, individual investors underperform the overall stock market, since they’re more likely to buy and sell their positions based on emotion and may not hold their positions long enough to take the long-term benefit. Those who build positions over time and don’t have knee-jerk reactions to the market are more likely to realize long-term gains.
The bottom line
Bear markets can feel grim. Like every market move, they’re fed by investor sentiment. By understanding the statistical length of bear markets and their intensity relative to a bull market and employing defensive strategies, as well as keeping a long-term view of the markets, investors can feel empowered to react rationally in a downturn and protect their assets.